SEC Files Financial Fraud Action Against Japan Based Controller
The Commission filed a financial fraud action against a former senior accounting officer and controller of Molex Japan Co., Ltd., the Japanese based subsidiary of publically traded Molex Inc. The scheme, which took place in Japan but impacted the books and records of the U.S. parent, was discovered after over twenty years when the controller of the Japanese firm wrote a letter of confession to the company. SEC v. Fusamae, Civil Action No. 15 C 3142 (N.D. Ill Filed April 9, 2015).
Katsuichi Fusamae was the senior accounting officer of Molex Japan, based in Yamato, Japan. The firm is a subsidiary of Molex, headquartered in Lisle, Illinois, whose shares were traded on the NASDAQ until the firm was acquired in December 2013.
Mr. Fusamae held various accounting positions at Molex Japan beginning in 1975. His responsibilities included investing excess cash from Molex Japan’s operations. Investments were restricted to certificates of deposit, government treasury bills, European currency deposits and prime corporate paper. The investments were made through firm brokerage accounts.
Beginning in 1989 Mr. Fusamae invested the firm’s excess cash in riskier securities. He also traded equities through a margin account. There was no authorization for these transactions Almost immediately Mr. Fusamae suffered losses. Initially, he was able to conceal the losses by borrowing from the broker and moving the funds into the accounts temporarily at year end to provide the auditors with appropriate account statement balances.
As the losses mounted Mr. Fusamae resorted to raising cash through the firm’s banking relationships. Although such documents had to have the company “seal,” which in Japan signified that they were authorized, Mr. Fusamae had access through his position. Mr. Fusamae collateralized the loans by pledging the firm’s real estate. He accessed the necessary documents through his position in the accounting department where they were kept. By taking control of the brokerage account and bank reconciliation process he was able to conceal his activities from the company.
Mr. Fusamae also concealed the unauthorized trading and borrowing from the outside auditors. As part of the audit process the audit firm sent confirmations to the brokerage firms and banks. When those confirmations were sent Mr. Fusamae arranged to meet met with the brokers and bankers and obtain the executed confirmations, assuring the executives that he would return documents to the audit firm. In fact he did return the confirmations through the mail as requested by the auditors, but only after altering the documents to conceal his activities.
In late March 2010 Mr. Fusamae was unable to secure additional funding to cover the loses. The next month he mailed a letter of confession to the company, revealing losses that he estimated to be about JPY 16.6 billion or U.S. $166 million.
The losses had a material impact on the financial statements of the parent company. In August 2010 Molex filed a Form 8-K disclosing that it was restating its financial statements for fiscal 2008, 2009 and the first three quarters of fiscal 2010 to account for the losses from the trading scheme. For the restated years Molex recognized loses of $4.7 million in 2008, $2.7 million in 2009 and $26.7 million in 2010. Mr. Fusamae knew that the financial statements of Molex Japan were consolidated into those of the parent, according to the complaint. That complaint alleges violations of Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is pending. See Lit. Rel. No. 23237 (April 9, 2015). The company settled a related Commission action. In the Matter of Molex, Inc., Adm. Proc. File No. 3-1642 (April 9, 2015)(here).